The effect of exchange rate policy on the economic development of Kenya

by Porter, Tom G.

Abstract (Summary)

This dissertation attempts to assess the negative effect
that the Kenyan governmentfs exchange rate policy had on
aggregate output and on sectoral composition of output. The
Kenyan government chose a rnacroeconomic policy set in order
to achieve certain economic, political, and social goals as
part of its development objectives. The policy mix included
industrialization policies, a expansionary monetary policy,
a pegged exchange rate, and other policies that created a
bias against the agricultural sectorç.
An empirical rnacroeconomic mode1 was constructed to
capture the economic processes that cause equilbirium
exchange rate fluctuations. The exchange rate is determined
by Kenya's price level relative to the rest of the world and
by Kenya's productivity relative to the rest of the world.
Exogenous events and government policies that affect the
price level and productivity will influence the exchange rate
as well. A mode1 of equilibrium exchange rate movements can
then be used to asçess exchange rate misalignment : i .e., when
the exchange rate undervalues or overvalues the domestic
currency relative to foreign currency.
Given a calibrated mode1 for Kenya's macroeconomy, a
simulation was used to compare Kenyag
s actual experience with
a counter-factual exchange rate policy that produces no
relative price distortions. The results indicate, among
other effects, chat a floating exchangs rate policy would
have Ied to
policy that
higher
Kenya
total output compared to the
actually pursued.
exchange rate
iii
The efforts 1 have made in completing the Agricultural
Economics Ph.D. program are small compared to the support and
advice that I have needed £rom my wife, Sarah. I have also
received a wealth of advice and encouragement from my
parents, brothers and sisters. 1 cannot püt into words how
important my family is or how grateful 1 am for their love.
1 extend my most sincere thanks to Dr. Chris D. Gerrard
for guiding the first two years of my research. The research
would have been impossible without his efforts. Dr.
Gerrardfs vision of a general equilibrium approach for
studyingmacroeconomic policy effects on African agricultural
development and his considerable capabilities were absolutely
necessary for directing my naive struggles. I rust also
thank Dr. Richard Manning, of the Economic Development
Institute of the World Bank. Dr. Manning recognized the need
for developing the mode1 for educational puvoses, and
generously funded the research.
The supervisors for the dissertation, Dr. Robert Lucas
and Dr. Hartley Furtan, each provided theoretical anà
practical direction for the research. Dr. Lucasr clear and
intricate understanding of macroeconomic theory and
macroeconomic modelling were indispensible for completing the
dissertation. Dr. Furtan helped ground the mode1 with
respect to Kenyafs agricultural development. He also pushed
me to write the dissertation in such a manner that I
understood what 1 was arguing arid that others could
understand the argument as well,
1 thank Dr. Richard Gray because he was always available
to offer advice and guidance for estimating and calibrating
the model. Dr, Gray's amazing range of skills has taught me
a great deal about econometrics and prior beliefs.
1 would also like to thank Dr. Terry Veeman, the
External Examiner for my defense. Dr. Veeman's questions
were en1
ightening and signif
icantly improved the final draf
t
of my dissertation. The entire cornmittee helped improve the
final version with their questions and comments during the
de£
ense.
The colleagues that 1 have worked with since the
beginning of my Ph.D. studies greatly contributed to the
experience. I know more about economics and distant parts of
the world because of the conversations, classes, and other
trials that we shared.
The faculty of Agricultural Economics contributed to my
education in many, and probably unknown, ways. I would like
to particularly thank Dr. Jack Stabler for being available
during the weeks leading to the defense, and Dr. Gary Storey
for being available as a faculty member and as a friend.
The final note cf thanks belongs to C. Arthur Battiste
and Anne T. Ballantyne. Art and Anne have provided me with
time, resources, and encouragement. Their professional and
intellectual accomplishments inspire me.
frieridship motivates me to excel.
Having their
To Sarah
Thank pu, Sarah. There is no amount of
knowledge that can compare to the love,
support, and patience that you have provided.
There is no howledge greater
than the love of family.